Tuesday, August 3, 2010

Manufacturing: Better Than Expected In July

The U.S. economy, badly in need of some better-than-expected business data, appeared to get some this morning in the form of the monthly report on manufacturing activity across the country. The report was issued by the ISM, or the Institute for Supply Management, some 30 minutes into the trading session, and it sparked some additional buying activity by the bulls.

Specifically, the ISM reported that growth in manufacturing eased to a reading of 55.5 in July, down from 56.2 in June. Still, that was somewhat better than the reading of 54.2 that had been expected. It also calmed fears that the manufacturing sector might be getting closer to an overall contraction. (Note that a survey reading of 50.0, or better, signals that manufacturing activity is expanding, while one that is below 50.0, but above 42.0, suggests that such activity is contracting, but that the aggregate economy may still be growing. A survey result below 42.0 is seen as consistent with a recession.)
The ISM, meanwhile, also released the various components of the overall index. Here, as well, the news was mixed, but a little better than expected. For example, the latest report showed that new orders increased last month, registering a score of 53.5; however, that was less than June's rate of gain, which was 58.5. The same story held true in production, where the index came in at 57 0, which was less than June's increase of 61.4. However, employment's growth increased to 58.6 from 57.8; supplier deliveries also gained more than in June (58.3 versus 57.3); and prices increased further (57.5 versus 57.0).

This report, notwithstanding the differing rates of improvement, is consistent with the rest of the data being issued, namely that the economy is still growing, but that it is doing so in an uneven, and often lackluster fashion. The nation's GDP, for example, which grew by a tepid 2.4% in the second quarter, was typical of the uninspiring inprovement now under way in the economy, at large. Our sense is that data in the upcoming weeks will be similarly unexciting.

Meanwhile, the ISM will also be reporting on non-manufacturing activity on Wednesday. Here, as well, we would expect some expansion, with a prospective reading of 53.3. That would be slightly below June's 53.8, though.
As for the stock market, it rallied further, adding to an opening gain that saw the Dow Jones Industrial Average climb by better than 100 points. That index is currently up be around 175 points, following a gain of better than 7% in July. Apparently, the bulls continue to see the economic glass as half full rather than half empty. Time will tell if they are correct.